Wal-Mart: Every Day Low Prices Business Model
Wal-Mart is a great example of a company that is transforming from originally having best in class alignment between its business and operating model towards having a significant friction between the two.
Sam Walton first founded Wal-Mart in 1962, as a discount retailer. Walton built his business based on the notion that passing costs to customers generates higher sales. This have lead the company today to operate more than 8,500 stores, employee more than 2 million employees, and serve more than 200 Million customers around the world.
Thus, Wal-Mart’s every day low prices business model and establishing itself as cost leader in the retail industry have been a strong source of growth for the company in the past. In order for Wal-Mart to be able to provide low prices for its customers, it had to be very conscious about keeping costs low and charging slim margins at the same. The premise of this business model is through keeping both costs and prices low, the business will capture value through much higher sales volume and profits, as a result.
Wal-Mart’s operating models and processes that enables it to achieve its strategic objective is based on the bellow:
- Lowest retail price in the market: Wal-Mart focuses on providing lowest possible price among competition, instead of providing promotions. Wal-Mart provides everyday low prices for its customers.
- Economies of scale and supplier pressure: Wal-Mart uses its volume to reduce its costs of purchase from vendors, as much as possible. Wal-Mart also leverage it economies to provide relationship with its suppliers that could would out volume discount that Wal–Mart would pass on to its customers. Moreover, 90% of the U.S populating lives within 15 miles of Wal-Mart store. These strategic geographic locations of Wal-Mart have assisted Wal-Mart to achieve very high volume and sales and generate economies of scale, as a result.
- IT Investments: Wal-Mart leverages IT capabilities to better understand and manage its operations. This ranges from investing in satellite systems that links all operating units with the company’s headquarters to radio frequency technology that would be able to optimize inventory management by reviling the exact locations of all inventory in the supply chain, which in return reduces its working capital investments and costs associated with it
- Supplier relations: Wal-Mart works extensively close with its suppliers and outsources its point of sales data to its suppliers. This data is used by Wal-Mart’s suppliers to mange their inventory and supply chain to reduce waste in inventory management at Wal-Mart. Essentially giving the decision of inventory management to the suppliers that can best estimate the throughput and cycle time of there products, in order to prevent stock outs or excess inventory.
- Cost conscious: Wal-Mart have always heavily emphasized on systematic cost cutting practices to keep their overhead costs low. This includes payroll – the largest expense on there income statement- for there sales associates of which most are paid minimum hourly wages.
- Great Customer Service: Strong emphasis by management to establish a hospitable environment for its customers. This includes greeting customers as they walk into the store, free parking, and flexible return policy
Thus, it is evident that in the past Wal-Mart’s strategy and business model perfectly aligned with its processes and operating model. This alignment has translated into a competitive advantage that yielded tremendous growth of its sales and profits.
However, in recent times the alignment between Wal-Mart’s business model of keeping costs and prices low and its operating process have been shifting away from each other. This has been mainly due to the evolution of technology and social websites. As social websites have been used by employee’s to voice their opinions and concerns of Wal-Mart’s low wage and requiring better wages and benefits. This have resulted in elevating pressure on Wal-Mart to raise its larges cost – payroll. Lately, Wal-Mart has announced that they will be increasing their hourly wages for there employees.
Moreover, Amazon’s e-commerce expansion into the retail industry has been gaining momentum over Wal-Mart, lately. This particularly driven by Amazon’s free same time delivery e-commerce that has gaining market share relative to Wal-Mart. This have lead Amazon to have a higher market value today than Wal-Mart. This is clear evidence that the strong handshake between Wal-Mart’s business and operating model have been weakening, lately. Thus, Wal-Mart is a great example of a company that went from having a strong alignment between its businesses and operating model to a company that has a conflict between them, mainly due to innovative disruption by social websites and e-commerce business.
Student comments on Wal-Mart: Every Day Low Prices Business Model
It’s a very good layout of WalMart’s operating and business model. WalMart is by far one of the top 10 businesses in the US and its operating model is known to be well established in years to serve its business model. Moreover, recent trends are worrying for the company management, as you summarized it perfectly.
After reading about this successful business model, it is very surprising to see that the company could not reach its phenomenal growth and business success in other geographies that much (other than the US and few other markets). After several entry and partnership trials in other countries, WalMart realized that in some geographies it is really hard to move the shopping habit outside the city. It is an established culture to hop on your car, drive for half an hour and complete your 2-weekly or monthly shopping. Seeing some competitors being able to compete with the low prices while located conveniently in the city and not aiming for high-volume sales discouraged Wal-Mart about the sustainability of success in these markets.
Also to your Amazon point: This is one of the hot topics in e-commerce / retail arena. People are very excited to see the consequences of this trend as WalMart is also trying hard with its online retail business arm.
Few things would have been helpful to mention. One of the pure operational integrations that Walmart has implemented is the way the products are located on the shelfs. There are no pretty clean shelves: stuff is just thrown there, or at least it may seem so to the first time customer. This is done on purpose – such allocation reduces cost of shelf maintenance. Also, interesting to note, customers actually love this “chaos.” Walmart once tried to move into the organic, more luxury type of produce, and it changed the store layout for that part of the products; however, customers found it very confusing, and such a strategy resulted in poor sales volumes. So Walmart shifted back to its core value proposition.
Another interesting fact is that while Walmart offers low prices for everyday products, they charge significant premiums for other items. Customers still buy, driven by their belief that all products are offered at the lowest price… buying a TV at Walmart usually is a lot more expensive than buying it at a specialized store or online.
What changed for Walmart is the environment. Market shifted as customers are now looking for other ways to shop. I would love to hear more about the competition, and how it disrupts Walmart’s business model.